Bank of America Corp has been deemed to need as much as $34 billion in additional capital, according to the results of a government stress test, a source familiar with the results told Reuters late on Tuesday.
Bank of America spokesman Scott Silvestri declined comment.
A possible $34 billion capital shortfall is certain to increase pressure on CEO Kenneth Lewis, who was last week ousted by shareholders as chairman of the biggest U.S. bank.
That ouster could lay the groundwork for Lewis's eventual departure from the company he worked at for 40 years, including the last eight as chief executive.
It may also unnerve investors who had hoped the results of the stress tests on Bank of America and 18 other banks might show the industry was in less dire condition than had been feared. Shares of major U.S. banks have nearly doubled since bottoming out in early March.
U.S. equity market futures extended losses on Wednesday and the yen gained following the news.
About 10 of the 19 banks being stress-tested are expected to need more capital buffers, a person familiar with the official talks has said. The person was not authorized to speak because the results are not public.
Many analysts have speculated that other banking companies that may need more capital, either because they do not have enough tangible common equity or are experiencing rising loan losses, include Citigroup Inc, Wells Fargo & Co, Fifth Third Bancorp, GMAC LLC, KeyCorp, Regions Financial Corp and SunTrust Banks Inc.
CEO HAD SAID NO CAPITAL NEEDED
The government has spent three months conducting stress tests on the 19 largest U.S. banks to determine their revenue, losses and capital needs, should economic conditions deteriorate even further than many economists expect.
Officials plan to release results of the tests late on Thursday, and are expected to reveal both aggregate and individual banks' figures.
Bank of America has been at the top of the list of those believed to need more capital, as it faces significant credit losses and a controversial takeover of Merrill Lynch & Co, which closed on January 1.
The $34 billion figure more than triples previously published reports of Bank of America's capital needs.
Lewis had told analysts on an April 20 conference call that we absolutely don't think we need additional capital, but added that credit conditions remained weak, especially in credit cards. Make no doubt about it, credit is bad, and we believe credit is going to get worse, Lewis said.
Bank of America that day reported a surprisingly large first-quarter profit, but much of the amount came from one-time gains and an accounting change, which may not be repeated.
BofA's nonperforming assets surged 41 percent in the quarter to $25.74 billion.
The Federal Reserve and Treasury declined comment.
Most of the 19 U.S. banks being stress-tested intend to hold press conferences on Friday to explain the results of the government's assessments, said a source briefed on the plans, adding that many of the banks are in the process of crafting capital recovery plans.
It's unclear how Bank of America might raise necessary capital, including whether it does so by selling assets or by issuing more common stock.
The bank has said it may sell its First Republic Bank business. It also could sell some or all of its holdings in China Construction Bank, China's No.2 lender.
If it is unable to sell enough assets, it might be forced to convert some of the government's preferred shares into common stock. This would dilute existing shareholders, and could leave the government as one of the bank's biggest shareholders.
J. Steele Alphin, the bank's chief administrative officer, told The New York Times that Bank of America would have plenty of options to raise capital on its own before it would have to convert any of the government investment into common stock.
We're not happy about it because it's still a big number, Alphin said. We think it should be a bit less at the end of the day.
Federal Reserve Chairman Ben Bernanke said on Tuesday that most of the capital-needy banks will be able to raise additional capital through either issuance of new capital or through conversions and exchanges, or the sales of assets and other measures.
Bank of America has received $45 billion of taxpayer money, including an emergency federal bailout that involved a $20 billion infusion in mid-January, two weeks after the Merrill purchase.
Critics believe Lewis overpaid when he bought Merrill for about $29.1 billion of common and preferred stock, agreeing to the takeover after less than 48 hours of negotiations and due diligence. Through Tuesday, BofA shares had fallen 68 percent since the Merrill purchase was announced on September 15.
Lewis is also criticized for failing to back away from the purchase after realizing in December that Merrill's finances were deteriorating fast, ultimately resulting in a $15.84 billion fourth-quarter loss.
Critics accuse Lewis of improperly failing to disclose Merrill's losses, and also for allowing Merrill to pay some $3.6 billion of bonuses to its own staff even as losses were mounting.
Lewis has said under testimony he felt pressure from officials including Bernanke and former U.S. Treasury Secretary Henry Paulson to close the merger, so as to not upset the financial system. This, however, prompted criticism from law professors and governance experts who said Lewis owed a fiduciary duty to his shareholders, not his regulators.
Bernanke on Tuesday told lawmakers he did not pressure Lewis to withhold information from shareholders about problems at Merrill.
Bank of America is more heavily exposed to the U.S. economy than JPMorgan Chase & Co and Citigroup, which are better diversified internationally. Analysts widely believe the government will not require JPMorgan to raise more capital.
(Additional reporting by Mark Felsenthal and David Lawder; Editing by Bernard Orr and Ian Geoghegan)